EU pares back Irish forecast amid fears of economy overheating

EU pares back Irish forecast amid fears of economy overheating

The EU and Irish flags flying outside the European Commission in Brussels. Photo: Reuters

The European Commission has trimmed its economic growth forecasts for this year and next due to weaker global demand and warned that Brexit and changes to the international tax regime pose risks to the budget.

The spring forecasts show the commission expects the economy here to expand by 3.8pc this year, down from expectations of 4.1pc in the winter forecast, and by 3.4pc next year, a cut from an expected 3.7pc.

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“Ireland’s export growth rates are expected to moderate as support from global trade is waning,” the commission said in a report published yesterday.

Even so, the economy will still rank in the premier league of the eurozone, beaten only by Malta’s 5.5pc growth rate this year and in a tie with Slovakia. It expects the bloc as a whole to post growth rates of 1.2pc this year and 1.5pc next.

The new forecasts compare with expectations from the Department of Finance for 3.9pc growth this year and 3.3pc in 2020.

“The uncertainty surrounding Ireland’s economic outlook comes mainly from external factors, particularly the terms of the UK’s withdrawal from the EU, as well as possible changes in the international taxation and trade environment,” the commission said.

It also warned that the domestic economy may be overheating as unemployment has fallen.

The commission expects the budget to be in balance this year, compared with government expectations of another small surplus, and expects there to be a surplus equivalent to 0.3pc of gross domestic product in 2020.

While Finance Minister Paschal Donohoe has pledged there will be no repeat of a €600m overspend on health this year, and has scheduled monthly meetings to keep a check on expenditure, the commission said it expected “a drift in current expenditure in areas such as health”.

“Risks to the fiscal outlook remain skewed to the downside, mainly reflecting uncertainty as regards the economic outlook and the sustainability of the current level of some sources of government revenue (notably corporate tax),” it said.

If the bad news for Ireland was slightly slower growth one of “risks”, the assessment for Italy in the commission’s latest report was sobering, and paves the way for budget battles with Rome as well as renewed uncertainty over the bloc and stability of the euro.

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The commission expects Italy’s deficit to balloon to 3.5pc of gross domestic product in 2020 as the euro area’s third-largest economy grinds out economic growth of just 0.1pc this year and 0.7pc next year.